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Blockchain in banking: what to expect?

Blockchain in banking: what to expect?

Edward van Dooren

Consultant Strategy & Analyses

24 November 2016

Blockchain in banking: what to expect?

The financial institutions Commonwealth Bank of Australia and Wells Fargo have set up a mutual transaction which is handled by a blockchain. It is the first global trade transaction between two independent banks with this technology, but it isn’t the first time that blockchain and banking are mentioned in the same breath. How can banks profit from this technology?

Simply put, a blockchain is a list of messages or transactions that is distributed among participants of a network. The participants reached consensus on which messages become part of reality and in what order they are handled. The best-known product based on a blockchain is the electronic currency bitcoin. Every bitcoin transaction is recorded in a blockchain containing information about the account in question. That blockchain information is crucial because people should not be able to use the same coins again.

Current stage of development

But the possibilities of this technology reach further than just the bitcoin. Recent research by Accenture shows that 90% of the banks are looking into the possibilities of blockchain. Banks see the possibilities, even though it is not mature yet. They can use it to cut costs, streamline their operations and improve the client experience. For example: thanks to the technology it is no longer necessary to have two copies of a transaction record which is more effective because of the smaller margin of error. Blockchain offers a safe environment for payments, which can be put to use for banks. They invest in blockchains which will act as digital ledgers and clients will be authorized to use this environment for their transactions. The technology can also help banks by creating order in various complex processes by making transactions more transparent for all parties involved.

Near future innovation

A more specific example of the advantages of blockchain is post-trade regulation, which could be an important outcome of blockchain technology. It is quite costly when every party has to use its own team of people to monitor transactions. With bitcoin technology, it should be possible to create a shared platform where all transacting parties use the same digital ledger. That way the reviewing, authorizing and verifying of transactions can be done faster so the personnel costs could be lower.

Not all of the developments won’t be usable in the near future. Experts think that the technology needs at least ten years to become mature. There are simply too many barriers for a quick integration of blockchain in the financial world. All parties have to align because a blockchain can only be successful if it is adopted by a large group of people. Next to that, there are the costs of developing new tools with this technology and possible legal risks. Those barriers are not insurmountable, but a lot of work has to be done before banks can really reap the fruits of their investments.